Metro/Kaufhof: price cut

So much for unwinding the conglomerate discount. Metro has spent years looking for a buyer for its Kaufhof department store chain. On Monday, it succeeded, selling the unit to Hudson’s Bay, the Canadian retail group. It will now be a general goods wholesaler, supermarket and electronics retailer. Yet shares in Metro fell 4 per cent.

Why the churlishness? The price — €2.4bn including debt (but not €400m of pension obligations) represents 12 times Kaufhof’s earnings before interest and taxation for the year to September. That sits between UK rivals such as Debenhams (11) and Marks and Spencer (14). A bid from rival Karstadt, theoretically possible but tricky, might have raised domestic competition concerns, and Karstadt has problems of its own. The Canadians had a well-funded proposal and pledged to keep stores open.

Kaufhof represented only 5 per cent of Metro’s group revenue and in a sector where Euromonitor thinks sales are set to fall. Metro can use €2bn in cash proceeds to reduce debt, which was €4.8bn at the end of March. But there will be no cash for shareholders, who suffered a dividend cut two years ago, and earnings for the year will fall 16-17 per cent as Kaufhof’s lightly-taxed profits drop out of the mix.

The sale will leave the company’s carried-forward German tax losses — estimated by Morgan Stanley at over €7bn — largely intact. Unfortunately, once Kaufhof is gone, Metro will have few German businesses profitable enough to take advantage of these losses. The wholesale business has very low domestic margins while perennially challenged Real hypermarkets made just €48m before interest and one-off charges in the first half. The Media-Saturn electricals unit is in much better shape, but for historic reasons cannot use the tax losses. Metro also has an occasionally fractious relationship with billionaire Erich Kellerhals, who still owns 22 per cent of the business he co-founded.

The wholesaler has heavy exposure to eastern Europe, with 106 outlets in Russia and Ukraine. Margins there are better but weak currencies there hit group sales in the first half.

Metro shares have significantly underperformed both the MDax mid-cap index and other European retailers over the past five years. Do not expect any respite; one discount has just been replaced with another.

Email the Lex team at lex@ft.com